In a recent 6-3 decision, the U.S. Supreme Court affirmed the Fifth Circuit’s holding that a highly paid oil rig worker who earned more than $200,000 per year was not exempt from the FLSA’s overtime requirements because he was paid a day rate and not a guaranteed salary.
From 2014 to 2017, Michael Hewitt worked for Helix Energy Solutions Group on an offshore oil rig. As part of his job duties, Hewitt supervised 12-14 employees. Typically, Hewitt worked 28 straight days before getting the next 28 days off. When he was working, Hewitt usually worked 12 hours a day, seven days a week, or approximately 84 hours a week. Helix paid Hewitt on a daily-rate basis of at least $963 per day, with no overtime compensation. Helix paid Hewitt every two weeks, and his paycheck amounted to his daily rate multiplied by the number of days he worked in that pay period. Under this arrangement, Helix paid Hewitt more than $200,000 annually.
After he was fired, Hewitt filed suit under the FLSA to recover overtime pay. In response, Helix asserted Hewitt was exempt from the FLSA’s overtime requirements. Despite the amount at stake, the dispute turned entirely on whether Hewitt was paid on a “salary basis.” In fact, Hewitt conceded his employment met the other requirements (the salary-level and duties tests) to be exempt from overtime. The district court, however, agreed with Helix’s position that Hewitt was paid on a “salary basis” and granted summary judgment for Helix.
Subsequently, Hewitt appealed, and the Fifth Circuit sitting en banc agreed with Hewitt, holding that to be entitled to the highly compensated employee exemption, an employer must be able to establish the employee was paid on a “salary basis,” which can be satisfied by paying a daily or hourly rate only if there’s a fixed minimum guarantee that bears a reasonable relationship to the employee’s actual compensation, which Helix admitted was not applicable to Hewitt. Helix then appealed the case to the U.S. Supreme Court.
Highly Compensated Employee Exemption
The FLSA’s regulations contain a special rule for “highly compensated” employees who are paid total annual compensation of $107,432 or more. Indeed, a highly compensated employee is deemed exempt under the FLSA if:
- The employee earns total annual compensation of $107,432 or more, which includes at least $684 per week paid on a salary basis;
- The employee’s primary duty includes performing office or non-manual work; and
- The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
On February 22, 2023, a 6-3 majority of the U.S. Supreme Court issued an opinion affirming the Fifth Circuit’s decision, holding that highly paid employees must be paid on a “salary basis” (in addition to the other requirements) to qualify as exempt under the FLSA’s highly compensated employee exemption.
In reaching its decision, the majority examined 29 C.F.R. § 541.602(a), which contains the general “salary basis” test that requires an employee to receive a predetermined and fixed salary that does not fluctuate based on the number of hours worked. In so considering, the Court observed that the text of § 541.602(a) explicitly excludes day-rate workers and further noted that the provision aligns with the common understanding of the term “salary” because it mandates that an employee receives a fixed amount per week, regardless of the number of days worked. Ultimately, the Court concluded Helix did not pay Hewitt on a “salary basis” as set forth in the provision, because it paid him by the day rather than a fixed amount for the week. The Court also rejected Helix’s position that Hewitt was a salaried worker under the provision because he was paid every two weeks and received at least the minimum required amount for each week that he performed any work, as the Court concluded that employees paid a day rate simply do not qualify as salaried workers under § 541.602(a), regardless of how much the day rate is.
The Court also held that the highly compensated employee exemption, which streamlines some of the rules set forth in the executive exemption for high earners, does not replace the salary-basis requirements in § 541.602(a) and §541.604(b) (which allow an employer to pay an employee on a day- or shift-rate basis without violating the “salary basis” requirement when the employee is guaranteed an amount that exceeds the minimum salary requirement and the amount guaranteed bears a reasonable relationship to the amount actually earned in a typical week), but instead incorporates them into the exemption. In reaching that conclusion, the Court noted that high earners are not “deprived of the benefits of the [FLSA] simply because they are well paid.”
The key takeaway from this case is that an employee is not exempt from the FLSA’s overtime requirements simply because they make a lot of money. Instead, the employee needs to meet all compensation and duties requirements under the FLSA to be exempt. This even includes employees compensated at or above the FLSA’s “highly compensated executive” amount. For most employers that do not pay highly compensated employees on a day or shift rate, the Supreme Court’s holding should be of little consequence, but this case does present a good reminder to ensure that employees classified as exempt meet all the requirements for the exemption, or they employer could find itself on the hook for unpaid overtime.
Travis D. Hanson
Foulston Employment Law Attorney